Good Strategy, Bad Strategy | Richard Rumelt

1. 0:00 – 4:29

   Richard’s background

   1. RRRichard Rumelt0:00

      Don't call it a strategy. (laughs) Call it an action agenda. There's huge numbers of people out there willing to sell you advice on, well, uh, your mission and your vision and your values, all these things that have to be in place before you can have a strategy. That's not true. We begin to try to identify, you know, the one or two key challenges that could actually be addressed, and what are we gonna do about it? What are the coherent actions we're gonna have to do to, to take these on. Okay, we're gonna, we're gonna go after this, and here's the action steps we're gonna take to do that. That's the essence of what you're doing when you're thinking strategically.

   2. LRLenny Rachitsky0:39

      (instrumental music) Today my guest is Richard Rumelt. Richard is an absolute legend in the world of strategy. It was such an honor to have him come on the podcast. He's the author of Good Strategy/Bad Strategy, which I've gifted to countless people who wanted to become more strategic. He's been mentioned so many times on this podcast. He's also the author of The Crux, his most recent book, which some consider his best book, which delves even further into his advice on how to craft a winning strategy. Richard was a longtime professor at UCLA Anderson School of Management, was on the faculty of Harvard Business School, and he's consulted on strategy with companies like Microsoft, Apple, and Intel, and also with government organizations like the US Army Special Ops Command, and folks like Donald Rumsfeld. In our conversation, Richard shares the concrete elements that make a good strategy, why we'd be better off calling them action agendas rather than strategies, why every great strategy starts with a clear diagnosis of the biggest challenge that you face, also how to actually lay out a strategy, why organizational dynamics are often the biggest hindrance to winning strategies, and so much more. I could keep going, but let me just say we cover a lot of ground in this episode, and Richard shares incredibly thoughtful and deep answers to each question. I am excited to bring you Richard Rumelt after a short word from our sponsors. Let me tell you about Commandbar. If you're like me and most users I build product for, you probably find those little in-product pop-ups really annoying. "Want to take a tour?" "Check out this new feature." And these pop-ups are becoming less and less effective, since most users don't read what they say. They just want to close them as soon as possible. But every product builder knows that users need help to learn the ins and outs of your product. We use so many products every day, and we can't possibly know the ins and outs of every one. Commandbar is an AI-powered toolkit for product, growth, marketing, and customer teams to help users get the most out of your product without annoying them. They use AI to get closer to user intent, so they have search and chat products that let users describe what they're trying to do in their own words, and then see personalized results, like customer walkthroughs or actions. And they do pop-ups too, but their nudges are based on in-product behaviors, like confusion or intent classification, which makes them much less annoying and much more impactful. This works for web apps, mobile apps, and websites. And they work with industry-leading companies like Gusto, Freshworks, HashiCorp, and LaunchDarkly. Over 15 million end users have interacted with Commandbar. To try out Commandbar, you can sign up at commandbar.com/lenny, and you can unlock an extra 1,000 AI responses per month for any plan. That's commandbar.com/lenny. This episode is brought to you by Miro. Do you ever feel like your projects aren't as organized as you'd like them to be? Or it's way too hard for people on your team to find all of the documents and files and context that they need for their project? Miro helps you streamline your workflows, organize information, and get your whole team on the same page. If you want to see what Miro can do for you, check out my Miro board that the Miro team helped me create, which includes all of my favorite plug-and-play templates, like a user journey map, my favorite one-pager template, plus a brainstorming guide. My board also has a place for you to share suggestions for this podcast, and also answer a question that I have for you. You can then take my Miro board and easily create your own to see how it feels. Make sure to check out some of my favorite features, like the sticky notes, the inline comments and charts, and also their really cool diagramming tools. Check it out at miro.com/lenny. Your first three Miro boards are free when you sign up today at miro.com/lenny. Find simplicity in your most complex projects with Miro. That's M-I-R-o.com/lenny.

2. 4:29 – 6:23

   What is a strategy?

   1. LRLenny Rachitsky4:29

      (instrumental music) Richard, thank you so much for being here, and welcome to the podcast.

   2. RRRichard Rumelt4:33

      Thank you for having me, Lenny.

   3. LRLenny Rachitsky4:35

      It is such an honor to have you on this podcast. So many guests on the podcast have mentioned you and mentioned the book. I probably bought your book for, I don't know, dozens of people over the years, and it is just so cool to have you on and to get to delve into the stuff that you teach. So, thank you again for being here.

   4. RRRichard Rumelt4:50

      Thank you.

   5. LRLenny Rachitsky4:51

      I thought we'd start at the beginning and then work our way up and kind of see where the conversation goes. What is the simplest way to understand a strategy? What is a strategy, and then what are the essential components of a good strategy?

   6. RRRichard Rumelt5:05

      Well, a strategy is a design for overcoming a high-stakes challenge. It's a mixture of policy and action designed to deal with a challenge. The challenge could have an upside. It could be, oh, geez, we were fooling around in the Back 40 and we discovered oil. What do we do? Or it could be negative. It could be that new innovation is driving us out of the market. But a challenge is, is the heart of strategy. The word comes from strategos, which is Greek, uh, for, uh... The Greeks elected ten strategoi to serve as strategic leaders at Athens, and, uh, they, th- they, they were elected. And they dealt with issues of the day. The, the Persians are invading. There's plague in town. We need money for a new temple. And that's where the word comes to us from. But it isn't just, uh, military. It wasn't in Athens.So, strategy is always about dealing with an issue, a challenge, a problem. What are we gonna do about global warming? What are we gonna do about China wants to reunify with Taiwan?

3. 6:23 – 15:04

   The essential components of a good strategy (the “kernel”)

   1. RRRichard Rumelt6:23

   2. LRLenny Rachitsky6:24

      You obviously have these very, uh, infamous, famous elements of a good strategy, something you call the kernel. Can you just talk through those pieces?

   3. RRRichard Rumelt6:33

      Right, sure. So, when I used to teach strategy for many years at Harvard and then at, uh, UCLA and other places, uh, there's lots of ways of looking at strategy. And so, years and years ago, we used to look at the, the Loran curve and the matrix and the five forces and all of those kinds of analytical tools. And it began to dawn on me at some point (laughs) that this isn't strategy. These are analytical tools for, for analyzing a problem, for thinking about things, for looking at competition. They're not strategy. Strategy is one. And I started to write a book, and the first chapter of the book was... or rather, the first part I wrote was the David and Goliath strategy story. So... And, and my point in, in writing about David and Goliath was that the surprise that David is able to beat this giant warrior, and that's a strategy story. Strategy story is about discovered strength. It's about, "Oh, wow, look at, look at how they did that. Look at how he got made in five moves. Look at how..." That's a strategy story. "Look at how Steve Jobs changed the world when people didn't expect it." That's emotionally what a strategy story is. So I wanted to write about strategy, and my wife, Kate, asked me, "Well, do you define strategy?" And I said, "Oh, yeah, it's really hard. I can't define it." And she said, "Well, you can't write a book about it if you can't define it." S- because I had this other conceptual scheme in my head that a whole of teachers and writers had, which is that there's a bunch of analytical tools. And, you know, this is back in, uh, 2005, 2004. And, uh, I- I- I gradually came to the realization all strategy is problem-solving. It's a form of, uh, dealing with challenges. And that was the basic idea going in the book. So, if that's the core of it, what's the basic activity? What are you doing when you create a strategy? Well, you're, you're diagnosing the situation. You're trying to figure out what's going on here. What's the nature of reality that you're dealing with? Now, humans can't understand all of reality. No one can. So part of what a diagnosis is, is, is, is a decision about what you're gonna pay attention to and, and, and, and a hypothesis or several hypothesis, hypotheses about what worked, what- what's going on, how do things connect together? And that's the beginning of the diagnosis. And so diagnosis is an understanding of the situation that you're in. Well, that's not enough. And you can use any of those tools that are famous for that, and you can try five forces. You can do any one of a number of things to try to comprehend the situation. Now, the world is more complicated than two-by-twos, unfortunately.

   4. LRLenny Rachitsky9:47

      (laughs)

   5. RRRichard Rumelt9:49

      I was educated as an electrical engineer, and my early years were spent designing spacecraft for NASA. And when I got into looking at business and business strategy stuff, I was always amazed at how unintellectual it was. (laughs) You know, that, here I was struggling to master Z-transforms and multi... and yet these people were looking at two-by-twos, some little diagrams and arrows and saying, "Oh, that's, that's what the company's about." So, a, a rich diagnosis of the situation, but then a guiding policy. Okay. So the guiding policy is, is, is what are we gonna do? Now, it's a simple thing to say, a guiding policy, and, and the guiding policy is, is, is sort of the strategy. It's the core of it. It's- it's, "Here's how we're dealing with the situation." And yet, when I say that, it flies in the face of... Uh, uh, well, as- as I was writing that, I had a client who had 17 priorities. This is what we're doing. We have 17 priorities. And that's the opposite of a guiding policy. That's a laundry list of all the things we wish would happen over the next year. We're gonna gain market share in China. We're gonna cut our emissions. We're gonna save energy. We're gonna become safer. We're gonna cut costs. We're gonna... All these different things that we're gonna do, and they're all priorities. You know, lots of people, they misuse the word priority when they're trying to do all that. Uh, you wouldn't want to be in a commercial airplane and hear the tower say to the pilot, "I'm giving priority to the following three planes on runway five."

   6. LRLenny Rachitsky11:46

      (laughs)

   7. RRRichard Rumelt11:47

      You know, right away, you know there's something wrong. Well, that's the word priority. It means the first. It doesn't mean the grab bag of everything that you can think of that might matter. It means what's first. And so the guiding policy is, is sort of at that level of what- what do we really have to do here, and how do we... What are we doing and what are we not doing to deal with the diagnosis that we created?And then the most important part of a strategy, the part that it's so easy to leave out because people like to think of strategy as this high level conceptual thing, is the coherent action. You- you- you have to do something and what you do has to be coherent in several ways. The first way is it has to deal with the problem or the diagnosis and- and the guiding policy. It has to implement. It has to be coherent in that you shouldn't do things to fight each other. You shouldn't say, "Oh, we are going to burn less oil and at the same time we're gonna import more oil." I don't... It doesn't make any sense to do things that are self-contradictory. And yet, people do. Um, you know, most companies have strategic goals of increasing growth than increasing, uh, profit. Magically that can happen in some cases but growth and profit are... They battle each other. Let's say we define profit as return on equity. Well if- if- if you're gonna increase growth and increase return on equity, how do you do that? Because you're- you're basically trying to invest less to get your return on equity out, or you're gonna grow and get your profit margin up. Well, how are you gonna do that?

   8. LRLenny Rachitsky13:46

      Yeah.

   9. RRRichard Rumelt13:46

      How do you get your profit margin up and grow faster? These are... This is baby talk, but CEO after CEO will stand up and say, "Well, we're gonna grow and we're gonna be more profitable." Um, and so having a coherent act- actions that are- that don't null on one another is an important part of strategy. So those three elements have to be there. There has to be an understanding of the situation. There has to be a guiding policy. How are we gonna deal with it? And that can be a long term sense of how we compete. Uh, you don't have to change your strategy every five minutes or every five years. If you're, if you're making, uh, Almond Joy candy bars or something, (laughs) you don't need to change your strategy constantly. If you're in the tech business, of course, you're- you have a shorter time horizon. And then the- the coherence and action, uh, is- is critical. And so these are- these are the three what I call basic elements, the CROWN, that if any one of three is missing, something's wrong. Uh, it's not really a strategy. It's something else.

4. 15:04 – 16:55

   An example of good strategy

   1. RRRichard Rumelt15:04

   2. LRLenny Rachitsky15:04

      Awesome. Okay. Is there an example that you could give that kind of makes these even more concrete of just, I don't know, something that comes to mind that's kind of a quick example of a strategy that, uh, illustrates these three components?

   3. RRRichard Rumelt15:16

      You know, if you're Microsoft right now and you're trying to, uh, adapt to- to AI, yeah, you have a diagnosis for what's going on with this. You see the challenge of how do we adapt to it. You create a guiding policy that you're gonna invest in one of the major leaders and then you're going to, uh, begin to incorporate that into your search engine. And then you have coherent actions. You know, you actually do some of these things and you... You know, it's not- it's not rocket science. The- the difficulty is that companies don't do that. There are companies that say, "Well, our future is, let's say something that's not in the software business. That's, uh, industry 4.0 or 5.0 that we're gonna have a... We're investing in the future of robotics and- and AI and- and again, computer vision and all that. That's- that's gonna be our future." And then you see what they're doing and they're... They've bought this company, they've bought this company, they've bought this company, and that's it. It's strategic assembly without any synthesis. So I mean, strategy's not mysterious. What's mysterious to me, what was mysterious to me, and what remains mysterious to me is how so many organizational leaders don't do it. Like, they create bad strategy. Uh, they- they- they do something that they say is strategy and then it's not.

5. 16:55 – 25:17

   Bad strategy

   1. RRRichard Rumelt16:55

   2. LRLenny Rachitsky16:55

      You have a whole chapter on this, on what is a bad strategy. Can we just touch on a few of the things you see as signs that your strategy is- is bad or maybe it doesn't even exist?

   3. RRRichard Rumelt17:05

      Sure. When I wrote Good Strategy / Bad Strategy, uh, a lot of the... A lot of people resonated with the bad strategy part of the book. Th- they wrote emails and said, "Oh my God. Thank goodness someone just finally said that these long internal meetings I sit through are not actually strategy or these documents that the company produces are not actually strategy." And they're not. A bad strategy... Uh, the standard bad strategy for a- a corporation is a set of profit goals or performance goals. A set of goals. Now, goals are the engineering of how companies work to some extent, but abstract high level goals, um, they're not a strategy. They're- they're something... They're ambitions.

   4. LRLenny Rachitsky18:01

      Mm-hmm.

   5. RRRichard Rumelt18:01

      And ambitions are not a strategy. A list of all the different things you wish would happen is not a strategy. I was asked to help ... part of the US Department of Defense create a strategy for all of s- 17 different intelligence agencies. Wow. (laughs) Yeah. How cool. Yeah, there are 17 different intelligence agencies. And the strategy basically that, that these people had read- Nice. ... said the 17 agencies should work, work together more effectively. Now, you don't have to be a Russian spy to see that what they're really saying is these guys aren't working together effectively and it's a problem. But they didn't say that. They said the strategy is they're gonna work together more effectively, just like the Army always comes out with our strategy is joining us, meaning we're having good trouble coordinating. But then there's nothing there about that other than this is what should happen. There should be more effective coordination. And, oh, we'll have an office of coordination and we'll put a person in charge of coordination. But there's no sense of, well, why is it hard to coordinate? What are the barriers to this? This has been going on for 34 years now. What, what's holding it back? What is the problem we have to solve? It's not there. And so y- I was, I was hired to do a foundry for a company and they said, "Well, our, our diagnosis is that we're not growing fast enough." Okay. (laughs) Uh, let's, let's get into that 'cause that's not a diagnosis. That's a statement. Uh, it's a statement of values. You would like to grow faster than you are. I'd like to be taller than I am. Uh, I'd like to have more hair. (laughs) Uh, you want to grow faster. Okay, so what's holding you back? And I'm trying to determine, but yeah, saying, "Okay, we're gonna grow," that's not a strategy. Bad strategy also is fluff. People will use fancy words to describe their situation. Uh, w- since I wrote that, you know, the, the term word salad has become, uh, common. And sometimes, there's a lot of word salad, uh, writing, uh, that people try to use to describe their situation. It sounds more abstract, perhaps more abstract, therefore it's more strategic. Incoherent stuff where we're going to do A and we're gonna do B, and those two things obviously fight one another. All those things are part of bad strategy. Bad strategy is a document or a set of intentions or a set of verbalizations where it's not a strategy. There's no diagnosis often. President Obama started out saying we're, United States is falling behind in education. And he, he's looking at the PISA, the P-I-S-A test scores of 15-year-olds around the world. And it's true. The United States is down in like number 30 of countries in terms of the scores of our 15-year-olds in math and in general knowledge. So okay, correct statement, we're falling behind. A real diagnosis would say, because... Instead of because, (laughs) you jump immediately to, uh, therefore, we're gonna have more people go to college than any other country. Well, having more people go to college doesn't solve the problem of 15-year-olds not being able to do elementary math. Hopefully it doesn't 'cause you'll screw up colleges everywhere. So that kind of gap is there, uh, where you don't do the diagnosis. Why do we have this? We argue over diagnosis in part of politics, in part of organizational politics. That's what we do and that's important. Uh, to do a strategy, you have to resolve the argument at some point. So why do we have a homeless explosion in Portland or Seattle or Los Angeles? And people argue about that. And some people say, "Oh, it's drugs." Some people say, "Oh, no, housing's too expensive." There are different diagnoses. Uh, but you, you... To, to deal with the issue, you have to decide on a diagnosis. The politicians right now sort of decided for a few years that the problem is housing's too expensive. We're gonna build housing at $700,000 a unit and give it to the homeless people. Uh, okay. If you build it, they will come. If they have... Uh, but then, you know, the next problem is, well, can't seem to build the housing. And so again, you need a new diagnosis. Why can't you build the housing? You're a rich, powerful country. Why, why can't you build some housing? So diagnosis is, is critical to understanding it. And, and in public policy, we argue over the diagnosis. And in organizations, we argue. And unless you resolve it, you can't act. So lacking diagnosis is, is one of the key reasons for bad strategy. Uh, the other, the, the fluff and the, the incoherent actions are, are fun to describe, but they're less common. The second major source of bad strategy is mistaking goals for strategy, saying, "These, these goals are our strategy." And that leaves out-... so many of the important aspects.

   6. LRLenny Rachitsky24:22

      Amazing. So just to summarize somewhat, if you're missing a diagnosis, trying to explain what exactly is wrong, it's a sign your strategy is incomplete or bad. If you're missing concrete actions, it's a sign that your strategy is incomplete or bad. There's also, I think, an element of coherence. The actions have to connect and there have to be f- a few, very few of them. I always like to think of three as, like, a good number. Is that, is that something you think about, like the rule of thirds for actions you want to take or even the guiding policy, or is there like a number that you think about, just like, no more than this?

   7. RRRichard Rumelt24:53

      A few. A few. Not too many. Not too many.

   8. LRLenny Rachitsky24:58

      (laughs) .

   9. RRRichard Rumelt24:58

      Not 17. It's hard, right? Numbers are ... We work best when we concentrate. We're more effective when we concentrate on a few things, a few people, a few, uh ... Focus is, is, is a fundamental source of power in strategy.

   10. LRLenny Rachitsky25:14

       Mm-hmm.

   11. RRRichard Rumelt25:15

       Yeah. Trying to do too many different things

6. 25:17 – 28:19

   The importance of focus and power

   1. RRRichard Rumelt25:17

      is, is de-focusing.

   2. LRLenny Rachitsky25:18

      I think there's, uh, this quote in your book that I think is ... and this may be paraphrasing, "Each time you say yes, you risk turning a nascent good strategy into a bad strategy."

   3. RRRichard Rumelt25:28

      Yes. Focus is ... When I was nine years old, I was at summer camp. And I had ... My parents sent me a magnifying glass and I was out there using the sun to try to cook a piece of wood. And I think I had a piece of cloth that I was trying to burn. Wasn't having much luck. And the magnifying glass focuses the sunrays, sun's rays on the spot. Counselor came over and he, he said, "Try this," and he pulled out a black thread from his T-shirt and put it down and I focused the sunrays hard. Popped up. So, stupid little story, but to burn that black thread, there has to be a source of power. The sun. There has to be a focus. That's the magnifying glass. Focus the power. And it has to be on a target that can be affected. It has to be a black thread, not a white thread. And th- that sequence is part of strategic ac- strategic action. You need a source of power. I say power, I don't say advantage or efficiency as they say power because there are different ways in which power is exhibited and, and you have to focus the power on a target that can actually be affected or achieved. And this is, this is real simple logic, but it's a discipline to focus power on a target that you can affect.

   4. LRLenny Rachitsky27:23

      Mm-hmm.

   5. RRRichard Rumelt27:23

      To take American power and say, "We're, we're going to change China's trajectory and Russia's trajectory and our own," and, you know, and then name all of 30 countries around the world that we're trying to ... We're diffusing our efforts 'cause they're, they're not the same. They're going in different directions. Obvious when you say it, but not so obvious as you live it, 'cause like any organization, like any big organization, US government has different interest groups. They're pursuing different interests, funded for different purposes with different clientele, and so there's graduated diffusion of effort. And one of the big issues in strategy is simply the organization. It, it ... Complex organizations particularly have a, you have a hard time focusing energy because of all the different

7. 28:19 – 34:38

   Identifying and utilizing power

   1. RRRichard Rumelt28:19

      interests.

   2. LRLenny Rachitsky28:21

      Yeah. I actually want to talk about both those things, so I'm glad that you teed them up. Let's talk about power. What is this idea of power and how does that play into strategy? Why is it so important? And then what are some examples of power that people can think about when they're trying to think about implementing and adding a power to their strategy?

   3. RRRichard Rumelt28:40

      Well, in a competitive situation, the fundamental aspect of power is something that's gonna give you some sort of advantage. Usually it's an asymmetry of some kind 'cause if two, if two fighters (laughs) are equally balanced or two horses are equally fast or two armies are equally ... And they, they meet in competition, it's 50/50, who knows what will happen? For a strategy, you need to exploit an asymmetry of some kind. You're a little faster or they're a little ... Something has to be different between the, between things. So that's the beginning of power is asymmetry. We can think of it as leverage. Uh, sometimes being first is a source of power. Uh, being first to recognize something can be a source of power. Having a reputation of a certain kind gives you some power that someone who doesn't have that reputation doesn't have. On the other hand, having a well-established reputation of a certain type can be the opposite of power, because people don't expect you to be able to do something new. They expect you to, to be able to do this, but not that. Having relationships can be a source of power. When Gertschner took over IBM as it was failing in the face of the microprocessor revolution-He recognized, uh, that their primary asset, their source of power was that they were respected and they had, they had entry into every large corporation on the planet. Nobody else had that.

   4. LRLenny Rachitsky30:44

      Hm.

   5. RRRichard Rumelt30:44

      As, as uh, an actual producing company. And so he said, "We're gonna embrace our customers. We're gonna bear hug our customers. We're gonna serve our customers 'cause, 'cause that's our source of our power. That's our leverage. That's the asymmetry." Now, the world begins to change and computing begins to move to the cloud. And IBM's customers, the largest companies in the world are the most hesitant to do that 'cause they've got the big IT departments that don't want to move to the cloud. And so small companies move to the cloud, and the big companies are, "Well, it's insecure in the cloud. We'd have to lay off people and we have these big machines we like to run." And so IBM then becomes disadvantaged in the new world because it inherits this big company orientation and that lagging behind. So, so power, the opposite side of power is this, what you inherit from the past can be the wrong thing.

   6. LRLenny Rachitsky32:03

      Hm.

   7. RRRichard Rumelt32:04

      And so, but, but the source of power is, is that. Source of power can be an invention. A source of power can be, uh, a particular customer base that, that you have identified and... It doesn't last forever, power, but, but all the different sources of advantage that are sometimes transitory and sometimes permanent, uh, are sources of power that, that a company has to use to compete and survive.

   8. LRLenny Rachitsky32:35

      I imagine people listening are just like, "Oh, man. I gotta figure out the power that, uh, the advantage that I have with my business." Is there any advice you could share about helping people figure out where their power might lie?

   9. RRRichard Rumelt32:45

      Oh, that's a, that's a, that's a good question, Lenny. So how do you, how do you figure it out? So I start, as I said earlier, with asymmetry. In what way is my company different than other companies? In what way is my team different? What, what do we know that other people don't know? What do we possess that other people don't possess? So there has to be some asymmetry to, to create, uh, competitive power. There has to be something different. Sometimes you have to redefine your space down, small enough that you can actually see it. 'cause, 'cause particularly a smaller company that doesn't have worldwide power has power in a certain marketplace or a certain set of customers or sometimes it's not customers. Sometimes the power is in who you can bring in, who you can hire. Now, so if you're, if you invented ChatGPT, you can bring in the smartest AI people for a year or two, uh, because, you know, everybody wants all the smart AI people that work at the cutting edge with the current winner. Uh, then they'll start arguing each other and in-fight and there'll be all sorts of embarrassing personnel things going on and someone else can grab that position if it's not well managed. Uh, businesses is, is exciting in that sense that, that it's not stable. It's not. It's not just as it was when I was first studying it. It's not just IBM and Sears and AT&T forever. There's a constant, uh, changing of the guard.

   10. LRLenny Rachitsky34:30

       For better or worse.

   11. RRRichard Rumelt34:32

       For be- Because if you look at government, there is no changing of the guard. They get stultified.

8. 34:38 – 41:13

   Types of power

   1. LRLenny Rachitsky34:38

      Makes sense. So in your book, you have this whole list of types of power. I'll just read them real quick. Leverage, proximate, objectives, chain-link systems, design, focus, growth, advantages, dynamics, inertia, entropy. There's also the book, obviously, The 7 Powers, that a lot of people are aware of. I guess, how do you think about just like the spectrum of types of power you can have? Is it, is it, is this it? Are there others?

   2. RRRichard Rumelt35:02

      There are... I started to make a list there in the book and I wrote a, a bit about chain-link systems and, uh, today, I mean, the power that, that, that new business models are exploiting is the power of the user base, what we called years ago network effect, where the more users you have, uh, the more useful a product is. So the, the idea of network effects first arose with the telephone system, which the idea was, uh, that you don't want to be connected to a telephone system that only connects to two other people. It's not all that useful. You gotta connect to the world to be useful. And, uh, my, my colleague Marvin Lieberman was taking an economics course at, uh, at Harvard University at the same time that Bill Gates was a student in that classroom and the professor's going on about network effects. And of course, that's what catapulted him and his software, MS-DOS at the time... Not MS-DOS. He had something called, uh, Basic, but, uh, the network effect was huge. He got angry about the network effect because people wouldn't pay him. They kept stealing it and using it, but pretty soon everybody in the microcomputer industry had M-Basic. Then we get the network effects, uh, from not just software, ... of, uh, user bases now with the internet. And so you get network effects with, uh, big social media. No one wants to be on a social medium if only three other people are on the social media. So he's got... H- having a large network, Amazon, you know, get big fast because the, the old... the economics are, are amazing. So we used to say, well, in a department store, economics are that you're, you're saving people the cost of going out of the store and walking downstream to another store. So now it's all in one place. Uh, supermarkets, the same thing. But they ha- look at a thing like Amazon where there, the ease of shopping on Amazon keeps people from leaving it and going to another website. Now other websites have gotten better and better, and some of that is less strong than it used to be, and there's this constant struggle with it. Nevertheless, the size of the user base there is an important source of asymmetry and power for the people who've come out ahead and won that battle for this round, this, this five years, 10 years. How long does it last before some other thing begins to take precedence? And now, uh, we have two-sided markets, whether it's credit cards or, or places where both buyers and sellers get together. And so the, here these big forces that companies are playing with right now are these network effects. And when the new generative AI, we have the possibility of stronger effects than we've ever seen before.

   3. LRLenny Rachitsky38:21

      Mm-hmm.

   4. RRRichard Rumelt38:21

      But we don't know yet. But the suspicion is that size is gonna matter, that the size of, uh, th- the data that you could put into the learning algorithm is gonna make your AI better. And so again, uh, big is gonna matter. Just think of Google and, uh, their ability to improve search based upon all the searches that go on, on their base every day. It's very hard for Bing to catch up because Bing doesn't have as much data to train on. And so unless there's some new innovation there that isn't just the amount of data, uh, the leader, again, has this asymmetry working for them. Now, the way you get around all that is by being specialized, by, by owning a particular approach that isn't the market leader's approach. And it's always been that way in business. But, you know, our attention is often attracted by these giants. So yeah, sources of power today when we look at new, you know, business models that are, that are part of the fabric are these network effects and things like that, that are very, very strong. And, uh, people are trying to get those in startups and in small firms, uh, within a certain market space and build it as fast as possible to get ahead of others. There's been venture capital available to, uh, to, to try those experiments and some of them work and some of them don't. But that's, that's this new, uh, age we're in now where the speed of building a market position with network effects is, is, is a dominant game in the tech space.

   5. LRLenny Rachitsky40:25

      I feel like Twitter is the ultimate example of the power of network effects, especially recently, where if you think about it, everything about Twitter has changed and it still continues to run. Like, you laid off 80% of people at the company. They changed the name, they changed the domain basically. The algorithms changed. Like what is... I don't know what is still the same.

   6. RRRichard Rumelt40:45

      How can you lay off 80% of the people and it, it still runs? I mean, you gotta wonder.

   7. LRLenny Rachitsky40:49

      I, I love Twitter. I'm on there all the time. I feel like it's never been better, which is kind of wild.

   8. RRRichard Rumelt40:54

      It, Twitter's fascinating. I mean, I, I, I, I, I tune into it every couple days and see what's going on. Uh, I'm thinking, it, it is just a, an amazing rumble of opinions and statements. It's, it's much more interesting than it was five years ago.

   9. LRLenny Rachitsky41:11

      There's a lot of diagnosing and not a lot of, uh,

9. 41:13 – 48:15

   Implementing power

   1. LRLenny Rachitsky41:13

      concrete actions. But anyway, I wanted to come back to the element about power. I think when people are thinking about power, it may not be clear where that plugs into the diagnosis, the guiding policy, and the coherent actions. Where should you be thinking and implementing this idea of where my power is when you're laying out your strategy?

   2. RRRichard Rumelt41:35

      To undertake a strategy that you think will work, you've gotta have a reason that it makes sense, and that that reason is, is, is, is derived from, from some source of power, some source for advantage. Ultimately, your power or your advantage is, is, is something based in history that has the feel of reputation or institutional skill, or it's some kind of asymmetry or knowledge that you have that others don't have. So you... It's a resource that you can use that your competitors or others don't have equal access to 'cause, 'cause you either have mastered it or you own it-... you heard it from the past. All those things are sources of, of the, the power that you use to make it not an even bet. So when you walk into a, a casino, there's no, there's, there's... Well, maybe if you play poker with skill, you can expect to make some money. But for the general casino, uh, games, uh, you're, you're going to expect to lose. And in business, statistically, if you come to me and you say, "I'm gonna open a new restaurant. What should my strategy be?" My answer would be, "Don't open a restaurant. Invest in the S&P 500."

   3. LRLenny Rachitsky43:26

      (laughs)

   4. RRRichard Rumelt43:26

      Because the, the statistics are that new restaurants fail. So what makes you think that you can succeed? "Oh, I really want to succeed." Not good enough.

   5. LRLenny Rachitsky43:42

      Mm-hmm.

   6. RRRichard Rumelt43:42

      "I trained under a chef who's been very successful." Oh, that's interesting. Tell me more. Uh, so there, there... Where is the symmetry here? Where is the source of power that, that... where you go from the, the odds? The standard odds in this game are against people where you think the odds are in your favor. Uh, that's, that's the source of power we're looking for. We're looking for this, this information, this skill, this, this thing in the field, the, the way the resources are arranged that's going to give you this edge. And some of that is, is sort of part of the situation and some of it's how you, how you shape and focus your actions. Strategy tends to be surprising when we see it, when we see it work. And it's surprising 'cause we don't expect it. We expect people to bumble around. We expect armies to bumble around. We expect nation-states to bumble around. We don't expect them to execute coherent strategies. United States went to enter Afghanistan and it wanted to catch Osama bin Laden, but at the same time, they didn't want to put an army in the field to actually catch him, 'cause it would be embarrassing to have that many Americans in the field. That's what happened in Tora Bora. The s- Secretary of Defense said, "No. We don't want to make it look like we're taking over the country." So they didn't try to catch him as hard as they could. And we want to have the education of women, and we want to have the democracy, and we want to have, have a long list that we want to have no, no opium production, but at the same time, our allies are the opium producers. Uh, it was the Taliban that got rid of opium. Americans couldn't do it. So we had all these different objectives and it doesn't work. You need to have a focus on something achievable. And what's achievable? Well, you know, nation building is hard stuff. It takes a century. You know, Afghanistan, uh, I'm off on a tangent here with Afghanistan, but it's a really interesting subject.

   7. LRLenny Rachitsky46:15

      (laughs)

   8. RRRichard Rumelt46:15

      Afghanistan was a war lord society, a bunch of different war lords running the place. Uh, well, what's a, what's a war lord society? Where else do we look for an analogy? Well, you can look at Scotland in 1650. You can look at France in 1300. You can look at Japan, uh, before the modern era. These were war lord societies. Well, how did they go from that to being a coherent government that maybe wasn't democratic at first, but still there was a government instead of just a bunch of war lords? It took, it took some group to conquer all the rest. And then it took a long time for them to put in the structures of, of government and then maybe it became a democracy, maybe not. But, but that's the process. It's not like you just go in there and say, "You're now no, no longer a war lord society 'cause we've decreed it." Um, I don't know. You're gonna ask me more questions about what it is people should know and how do you get these sources of power, how do you get these insights. I'm a big fan of history. I'm a big fan of knowing things about what happened, business history, biographies, world history. And if you don't have access to other times and other places and other things that have happened, it's very hard to think strategically about the situation you're in, because there isn't a science of strategy. It's not like physics. It's not like engineering where we can write down the equations of stress on a beam and say, "How thick does the beam have to be?" It's not like that. It's... A lot of it is, is based on analogy to, to previous human experience.

10. 48:15 – 55:23

    The importance of historical knowledge

    1. RRRichard Rumelt48:16

    2. LRLenny Rachitsky48:16

       That is an amazing insight. Is there anything you find most rich and valuable in terms of history, periods, empires, stories that you find most connects and... as an analogy? Is it like... Is there anything you find consistently as useful or is it just read as much as you can and you'll often find something in there?

    3. RRRichard Rumelt48:36

       Yeah. The, the, the, the, the further back we go in history, the, the leaner is the, the... It's less rich.W... Um, the best histories are, are, are written by the people at the moment it's happening, or very soon after. You know, history books and things like that are someone's opinion. Uh, but, but, you know, like our own history here in the United States es- we have pretty good documentation about what went on in the Indian War, what went on. Why we had these big, uh, cycles of economic growth and then depression. We had depressions in 1840 and then in 18... after the Civil War, and there was another huge panic depression in 1890s. Uh, you'll learn that a lot of people don't even know that these things happened. How did they happen? And, and of course everybody knows about the Great Depression of 1929, '30s. But go back and ask, how did that happen? When did that happen? And you'll hear professors opine about why it happened. But there's no agreement. The biggest economic fact of the last 150 years, we don't know why it happened. Go back and, and, uh, and, and you can go online and look at the Wall Street Journal or The New York Times from that era and start in September of 1928, and just look at the front page every day, which I've done.

    4. LRLenny Rachitsky50:14

       (laughs)

    5. RRRichard Rumelt50:14

       And you can see it unfold. And it's a surprise to everyone. They're going, "Well, Ford just laid off some people, but it's temporary. They'll hire them back." Um, this economist says, "Well, it's a temporary this, it'll come back." And, and it gradually gets worse and worse and worse, and there's no understanding of it. There's not a lot of analysis. And so you've got Milton Friedman saying, "Oh, it's monetary." They didn't loosen up the money supply. You got other people saying things. But, but t- put yourself back at that moment in time and see what people saw and realize that no one understood what was happening, and to form your own opinions. That's the, that's the diagnosis skill. Or that's the, that's the feeling. Now, let's suppose you fall off a boat. You're on a cruise ship and you fall off and you're, you're now in the ocean. It's terrible and it's confusing and there's waves and there's water and you're, "I don't want to drown." And you look around and you see, oh, here's a floating piece of wood, let me grab it. Wow, that feels a lot better. That's how it feels when you look at a confusing situation and the first idea of how to understand it comes to mind. Oh yeah, I've got this piece of wood, now I'm not drowning. But is it right? Th- the most important intellectual tool we have is to think again, to, to say, "Okay, I, I came up with this diagnosis because I thought this and I thought this. Is there another way to look at this situation? Is there a bigger piece of wood over there that I can grab onto?" That's the hard thing. When I looked at the Great Depression, I, what I saw is the automobile. See, if you look at capital goods, all cap- most capital goods that the public buys, the adoption curve goes up like this, it peaks, and it declines, and then it comes back up again. Because there comes a point where everybody who can afford one has got one, and then the new sales drop off. In my mind, that's what I saw. 1929, everybody who could afford a car had a car, and the auto industry began... The first signs of the Great Depression were in the auto industry. So that was my claim that I agreed. Now, I don't see anybody else writing about that. But that's the, that's the exercise and, and, and to, to exercise your mind about trying to understand complex situations, it's best to go back. You don't have to go back to the Great Depression, but you can go and try to find situations that other people had to deal with and, and look at as much data as you can and, and practice that. That's what education should be in a business school. It's not. They teach theories now because it's so much easier to teach a theory than intellectual, uh, structure.

    6. LRLenny Rachitsky53:58

       It's also a lot more work reading a lot of books and history and studying and thinking.

    7. RRRichard Rumelt54:02

       Oh, yeah. (laughs)

    8. LRLenny Rachitsky54:03

       (laughs)

    9. RRRichard Rumelt54:04

       I had a colleague at UCLA who assigned a book to MBA students and they went to the dean and, and got kicked out of the course. "A book, who wants to read a book?"

    10. LRLenny Rachitsky54:16

        Oh, man. Sounds like you have another book in you writing about the Great Depression and what really happened there.

    11. RRRichard Rumelt54:22

        Uh, maybe, maybe.

    12. LRLenny Rachitsky54:23

        Oh, man. Exciting.This episode is brought to you by Vanta, helping you streamline your security compliance to accelerate your growth. Thousands of fast-growing companies like Gusto, Calm, Cora, and Modern Treasury trust Vanta to help build, scale, manage, and demonstrate their security and compliance programs and get ready for audits in weeks, not months. By offering the most in-demand security and privacy frameworks such as SOC 2, ISO 27001, GDPR, HIPAA, and many more, Vanta helps companies obtain the reports they need to accelerate growth, build efficient compliance processes, mitigate risks to their businesses, and build trust with external stakeholders. Over 5,000 fast-growing companies use Vanta to automate up to 90% of the work involved with SOC 2 and these other frameworks. For a limited time, Lenny's Podcast listeners get $1,000 off Vanta. Go to vanta.com/lenny. That's V-A-N-T-A dot-com slash lenny to learn more and to claim your discounts. Get started today.

11. 55:23 – 1:02:47

    How to write an action agenda

    1. LRLenny Rachitsky55:23

       I wanted to zoom back in on something very tactical. So say you're a, say, product manager listening to this that is thinking about writing or has to write a strategy for their team. Say it's like they're working on the onboarding experience of their product and they're about to sit down and start to write out the strategy for their team and say they have like a general idea of what they want to do. Do you have any advice for just like how to lay out a strategy?

    2. RRRichard Rumelt55:47

       Yeah.

    3. LRLenny Rachitsky55:47

       As you talk, I think if there's a section diagnosis, a section guiding principle, section actions, and then there's power in there in the guiding policy.

    4. RRRichard Rumelt55:55

       Right.

    5. LRLenny Rachitsky55:55

       Is that how you lay it out? Do you have any advice for how to w- write this out?

    6. RRRichard Rumelt55:59

       Yeah. So I wrote The Crux because I felt that that kernel was not sufficiently sharp enough for people. And even in The Crux, I could... If I could rewrite the Crux book, I would maybe write it a little differently today. A whole couple things I would, I would change. First, it's really important to understand the challenge, the problem. Diagnosis is not newly understanding the world. It's understanding the challenge you face. What makes it hard? So the question I ask client is exactly that. What makes it hard? Client will tell me, "Oh, we want to open up business in Australia where it's a market we haven't tapped." And I'll say, "Okay. So why are you and I talking about that? You're the CEO. Just tell somebody to do it. What makes it hard?" "Oh, well, we don't know anybody in Australia and they'd kick us out." Yeah, he'll tell me. (laughs) If, if, if you push, he'll tell you why it's hard. But that understanding hasn't been percolated into a strategy. Part of the problem is that the concept of strategy has been so beaten up by thousands, hundreds of books and thousands of webar- websites that people have a hard time trying to figure out how to create a strategy because they're drawn up, down, left, right. So, my two pieces of advice to anybody that's actually trying to do this is A, state the problem, and B, don't call it a strategy. (laughs) Call it an action agenda. That you're not creating a strategy, you're creating an action agenda. What are we gonna do about this problem? That's essence of what you're doing when you're thinking strategically. You're recognizing the problem and you have an action agenda to deal with it. It's not 5 years out and 10 years out. It's not your general mission to build a better world. It's none of that. All of that is a different literature form. 'Cause there's huge numbers of people out there willing to sell you advice on, well, how your mission and your vision and your values and your all these things that have to be in place before you can have a strategy. And that's not true. It's a different model. I start now with ambitions because people want to put ambitions in place. They get angry with me if I don't allow them to talk about their ambitions. So we, we start with ambitions and okay, you have all these ambitions and I write in The Crux that when I was 25 I wanted to be a top business school professor, I wanted to be on board of directors, I wanted to drive a Morgan Drophead +4. I wanted to climb the great mountains of the world. I wanted to learn to fly an aircraft. I wanted to marry a beautiful woman and have successful children. I wanted to have a townhouse on the Île Saint-Louis in Paris. And on and on and on. I had a lot of ambitions. Uh, that's not a strategy. We all have ambitions and every company should have ambitions. If we look at all those ambitions, and let's say I'm 25 years old, well, what's keeping me from reaching them all? Well, I'm not ready to join board of directors. I'm not experienced enough. Oh, okay. So I put that over here.... I can't afford the penthouse on the hill, so I'll cut it over here. How about the ambitions? Don't you have any chance of, of making progress on them now? Well, beautiful woman. Yeah. Yeah. I don't know anyone who can make it out to me if you ... Well, I hope we can do something about that. So which of your ambitions can you begin to make progress towards reaching, and what's holding you back? What are the barriers? What are the problems? So I ap- I approached the question of the problem now through the filter of the ambitions. That, that these are ambitions. Fine, let's accept them all. And which one can you actually make some progress on, uh, today and, and what's making that hard? What are the, what are the challenges? So you're, you're choosing a challenge. You're choosing of the possible challenges you could face up to. You can't do them all. So there's a focus there. You're choosing which challenge to focus on, and that challenge has to be A, important, and B, it has to be achievable. You have to, it has to be something that you can address. It has to be an addressable challenge. And so the, the, the search for an action agenda, I'm not calling it a strategy, is this balance between problems that are important because they're close to your ambition and problems that you can actually address and do something about. And that, that overlap then becomes the choice you make. Okay, we're gonna, we're gonna go after this and here's the action steps we're gonna take to do that. And if it's a big company, the action steps may extend over two or three years. Smaller company, typically in six months to a year. And just things we're going to do, not goals we're going to achieve. These are things we're going to do, action steps. That's, that's sort of the way I put it together today, which is slightly different than the way it's

12. 1:02:47 – 1:10:40

    The crux

    1. RRRichard Rumelt1:02:47

       put together in The Crux.

    2. LRLenny Rachitsky1:02:48

       Yeah. I love this advice. That's such a simpler way of thinking about strategy. It's an action agenda. Here's the things we're actually gonna do and then it starts with the challenge. And just to talk about the crux briefly, the crux is named after this concept in mountain climbing of the hardest point of the mountain climb where people, if they get past that, it's all downhill. And I think basically the point there is focus on the most challenging, like the biggest challenge that you need to overcome to achieve these ambitions you're describing. Is, is that roughly the way to think about it?

    3. RRRichard Rumelt1:03:21

       Yeah. Yeah. And the idea comes from a design and it comes from climbing. 'cause I used to be a climber, a rock climber and a snow climber. And the crux in a climb is the hardest part, the hardest pitch or a pitch the hardest move is the crux of that piece. And then the basic advice to a climber is if you can't do the crux, don't do the climb (laughs) because you're gonna fall off there. Now that's not exactly true 'cause you can try it over and over again until you get it. But in general, particularly if you're looking at an outline climb, you better not take on a climb where you can't handle the crux. That's why people go bouldering to build their skill up to handle certain kind of crux. And so that's, that's what the concept of the crux comes from. Now in, in business, the crux is the hardest part of the problem. And from the design point of view, going through the skilled designers, whether they're an engineer or an architect or someone else, there's, there's, there's usually a challenge, a problem. Uh, uh, I.M. Pei was hired to take a look at the Louvre in Paris. And it had, they had a dusty parking lot in the center of this giant palace that had become a museum and they wanted an entrance to the Louvre there. And the problem is they didn't want, he didn't want and they didn't want like a new building that would obscure the Louvre because the Louvre itself, the building itself is part of the story. It's part of the scene. And yet at the same time they, they needed to have an entrance 'cause the entrance at that time was off on the side, on a sidewalk. And he looked at the situation and, and, and the, and the competing needs and the problems and he had an insight into, well, we'll build a transparent building. We'll build a building out of glass so that you see through it to the Louvre. It doesn't obscure it. And of course, if you build a rectangular building out of glass, the top will get dirty. So the Louvre, surely not glass. Now, that design insight is something that software engineers, hardware engineers, mechanical engineers, base science engineers like us experience when we look at a dilemma and we try to focus on what makes this hard and, and, and, and then by focusing on the difficulty, we, we see a way around it. Elon Musk focused on, well, why is it so hard-... to reuse a rocket. And it's so hard because as it comes back into the planet at 18,000 miles an hour, it burns up in the atmosphere or we have to spend a lot of money on heat shields. And at some instant, he said to himself, "Well, why not, like science fiction, just turn it around and have it land on its rocket?" Well, it's not enough fuel. Well, why don't we carry more fuel? (laughs) So SpaceX. When I was designing... I was a conceptual designer of the machine that became Voyager. And went out past the planets into interstellar space where it's floating around right now. Well, one of the problems is how do you know where Jupiter is? It's, it's right there. Okay, but how do you know where it is plus or minus 100 miles? How do you know exactly where it is? When we sent a mission to Mars, we were off by 500 miles. So Jupiter, how do we know exactly where it is? 'Cause we can look at it through our telescopes and we can look at it from the right side of our orbit and the left side of our orbit, but still there's a couple thousand miles error in that. That's too much. And then studying that problem, the simple solution suddenly flashed. And I, I wish could claim it was mine, it wasn't. Which is, oh, we'll take a picture of it once we're halfway there. And we'll send that picture back and we'll see it against the distant stars and now we'll have a triangulation and bing, we'll know where it is. So designers experience this sense of focusing on the crux of the problem, the hard part, and then seeing a way through. And that's strategy. Strategy isn't picking a strategy out of a list of common strategies. It's looking at the problem, what makes that problem hard? And seeing a way to solve it. Now that's called insight, and insight is scary. It's scary because it's not guaranteed to happen. We want to innovate but we're scared of insight. We want to be the first, but we'd like to pick our strategy off a list of common strategies for being first. We want to beat the market, but we don't want to study enough to have an insight. So insight is critical. Insight is not magical. It comes from immersing yourself in the nature of the problem and you will have, at some point, an insight about how to deal with it. Uh, uh, it doesn't always come when we want it to. It can come while you're driving a car. It can come the next day. It can come in the shower. Charles Darwin reports that his insight into the nature of evolution came as he stepped off, um, a carriage into the village green somewhere. Boom. Suddenly he said, "Oh yeah, I thought it was obvious." It's like how we raise animals. We, we breed the, breed the strongest. You know? Yeah, sure. Why was that so hard for me to see?

    4. LRLenny Rachitsky1:10:14

       So I think one of the big takeaways here is that if you want to get better at strategy or be more successful with how you think about strategy, spend a lot more time on diagnosing the problem and finding the biggest challenge that is keeping you from what you're trying to achieve, and your insight might come the more you immerse.

    5. RRRichard Rumelt1:10:30

       Yeah. And call it an action agenda. Here's what we're going to do. Not here's all the things we wish would happen.

    6. LRLenny Rachitsky1:10:39

       I love

13. 1:10:40 – 1:15:44

    Challenges to executing a strategy

    1. LRLenny Rachitsky1:10:40

       it. You mentioned this point that some of the biggest challenges to executing a strategy is organizational dynamics and politics is a part of that. Is there anything you could share for folks to help them through that? You talked about one of the biggest challenges people just want to keep adding more priorities. There's all these needs. Everyone wants to include their thing in the strategy. Is there anything people can do to improve how this works?

    2. RRRichard Rumelt1:11:04

       Typically, I'll say typically, we need hierarchy of power. Because there has to be some mechanism for deciding what we're gonna do. And there's people with different interests and different pri- private interests and public interests and somehow there has to be a choice about putting some of these aside and doing this. But you can't say our strategy is to do everything that everybody wants to do. That's what happens when you form a committee in a city and you say, "What's our city strategy?" And they say, "Oh, we're gonna paint the park benches, we're gonna clean up the grounds, we're gonna build a new this, we're gonna..." They have a long list of everything they're gonna do with that... and anybody who raised their hand and says, "Well, what about the bridge? Can we..." You know, "Oh yeah, let's put that in too." That doesn't go anywhere. So we, inside organizations, people have different opinions, so that's part of it. They have interests that they may not state clearly. I interviewed Secretary of Defense Donald Rumsfeld while we were invading Iraq second time and I was actually interviewing him about budget matters. But-He asked me, "Well, what do you do, Professor?" And I said, "Well, I do strategy." And he said, "Well, strategy, that's a hard subject." He said, "You know, I've got people here in the defense department who... have an expert on anything. You want to know the clan structure in Iraq, we got people that know. You want to know the weather, we got people that know. You want to know how many sorties we can fly in 24 hours, people who know. I got any, anything you want to know, we got someone who knows about it. But they all disagree. And each have their own private agenda. They have a contract they want to get, they have a company they want to support, they have a, uh, conceptual idea they want to push. So every little bit of information comes with an agenda. Sometimes obvious, sometimes hidden. And how do you put all this stuff together to come up with a strategy? It's, you, do you academics have a solution to this?" And I said, "No, we don't. We don't know much more than, you know, what you would two, three thousand years ago, which is you put five to eight smart people in a room and you tell them to come up with something." But his question is at the heart of what I call foundry, which is how do you get a group of people to coalesce around an action agenda? And, and what process would you use and how do you do that? That's a different question than what should our strategy be. The question is, well, how should you go about creating a strategy? Should you ask the product manager to write it down? Or should you ask the CEO to come up with it? Should you hire a consultant? How do you, where do you, how do you do this? In my experience working with companies is that the senior executives have to do this. And my experience is that the senior executives know pretty much everything you need to know to do this. That you don't need, you know, uh, consulting firms to come in and analyze everything and to do... Yes, you'll gain some insight if they come in and do a competitive analysis and a customer analysis and all of that. But, the basic issues, the challenges you're facing, they know that. It's not mysterious. They know all that stuff, but they disagree about the importance of different things. And more importantly, they occupy positions of power that if we go this way, this is going to be hurt. And if we go this way, there will be more money for that. And so they're not, their interests are not aligned, which is part of what Rumsfeld

14. 1:15:44 – 1:20:39

    The need for a decider

    1. RRRichard Rumelt1:15:44

       was referring to. And so the, the problem of strategy inside an organization is diversity of interest and fear of action. Because action, when you do something in an organization of any size, it involves people changing what they do. It involves changing power relationships among humans in some way, that someone who's been the alpha maybe is not the alpha anymore, someone else is the alpha. This is, this is heavy stuff. And this is why we have a hierarchy because someone in the end has to say, "It's going to be this way." And that's he- people are hesitant to do that. CEOs are hesitant to do that, more so today than when I was a young man. It's, it's become hard for people to do this. If you go to the bookstore and look at the management section in the bookstore, most of it's about leadership. And the leadership is mostly about perfecting yourself. It's not about leading anybody. The, the theory is that if you perfect yourself, then somehow rays come out of your head and people will follow you because you're so magnetic and you're so perfect and you're so wonderful and you're so insightful and that people will follow you. You won't ever have to say, "Figures. Do that." It's so embarrassing to tell somebody what to do. And so this is the world we live in today, where one of the problems in doing strategy is that it's s- has somehow been displaced by this literary form about mission. And, and management is being displaced by leadership, which is the idea that the leader has a vision and people... It, it did, it happened in the '80s and there's a whole literature there about transformational leadership that percolated through the system. And those, I'm not against leadership, but you have to tell people at some point, "We're going to do this and we're going to do it this way and Bob's going to be in charge of this aspect and John's going to be in charge of that aspect." And there's a hesitancy to do, to make those choices because that's part of the action agenda.

    2. LRLenny Rachitsky1:18:23

       So the takeaway there is essentially have a decider. Makes me think of actually of George Bush. You talked about Rumsfeld, but George Bush's famous quote, "I'm the decider." I don't know if you remember that?

    3. RRRichard Rumelt1:18:33

       Yeah, that's true. One of the things we see in, in, in government particularly is presidents have a hard time getting advice because they, they surround themselves with people who want to please them, number one-We rarely... It used to be, uh, I remember during, uh, Woodrow Wilson's administration when he decided to take some hard action. Th- the Lusitania sank and he had to do something vis-a-vis Germany. And the Secretary of State disagreed and quit. That was it, quit. I disagree. Uh, don't see that so much anymore. Uh, the, uh, people... Organizations get frozen because of the difficulty of changing positions of interest and power inside.

    4. LRLenny Rachitsky1:19:30

       Humans are complicated.

    5. RRRichard Rumelt1:19:34

       Well, if you look at Nokia, you know, one of the big examples of a, of a strategic error was Nokia was the leading smartph- phone maker in the world. And then somehow it lost its ability to compete. And, you know, interesting questions, big, fair amount of research on this is how did that happen? One way it happened was they replaced the engineers who used to run the company with lawyers and accountants. Nothing wrong with lawyers and accountants but they, they didn't have a feel for this hardware software set of issues. And another was they- they put in a matrix organization that so diffused power inside the organization that nobody was actually in charge of anything (laughs) in particular. I'm exaggerating, but, you know, the CEO kept pounding the desk and saying, you know, "Apple's coming out with this smartphone and you have a touchscreen and somebody here should make one of those." But there was no one in authority to do such

15. 1:20:39 – 1:26:04

    Strategy for startups

    1. RRRichard Rumelt1:20:39

       a thing.

    2. LRLenny Rachitsky1:20:40

       Maybe a final question on the other end of the spectrum from a Nokia, from a startup founder's perspective. What is a strategy and what should a strategy look like if you're just a founder, pre-product market fit, just trying to figure out where you want to go? What should a strategy look like there? Do you even need a strategy?

    3. RRRichard Rumelt1:20:56

       Well, it's, it's, you're dealing with a lot of uncertainty.

    4. LRLenny Rachitsky1:21:01

       Right.

    5. RRRichard Rumelt1:21:01

       When you're a founder and a startup, you're making a bet. You're making a bet. Like an oil well wildcatter would say, "I bet there's oil under this ground and we're gonna drill and we're gonna find it." There's a certain amount of bet that's going on. And you should be clear about the nature of the bet. The, the reality is gonna be revealed to you in bits and pieces as time passes, whether a certain approach is gonna work or not. What we find doing research on startups, Silicon Valley startups, is they start out typically aiming at a particular product market solution. You know, and the idea that you have in your head is there's a set of customers who want A, would like to have A, are being denied A, but we have a way of giving them A. Something, a product or service. Now some people, they aren't that even advanced. They basically say, "I know how to make something and I'm gonna try to sell it." You know, fast track approach. But if, if you're... If you have any chance of succeeding, you have a sense you have a target market and you have a solution to the target market's problem in mind. And now you're gonna, you're gonna go after it. And the research that we have done on these startups is that generally it doesn't work. But the ones that survive and prosper switch. They say, "Well, it isn't that customer, it's a different customer." And they go after that customer. Oh, and that customer wants a slightly different product. And they, and they, they switch over a period of, of a year or two, three years, bang, bang, until something begins to click and they begin to grow and they begin to add functions and assets. So there's a search. There's a search like a truffle hound searching for the truffle, that's going on. And you've got to be... I think you've got to be of two minds. Like so many things in business when you're doing this, you've got to be of two minds. You've got to be convinced of the certainty that you're gonna win, and you've got to be willing to shift when things aren't working. And that's, that's, that's a double-jointed exercise that some people can do and some people can't. It's almost a human skill to, to both commit and to be willing to move. But it's a bet. Uh, you should be clear in your own mind about the nature of the situation, the technology that you're, you're betting on. Uh, sometimes it's evolving so fast, like, uh, generative AI is right now, that you can't be sure. That you're gonna take a position where you think things are gonna be in a year. And that's very, very entrepreneurial, very edgy stuff. Um, but it's not new. Go back and read about the beginnings of the electrical industry or the beginnings of aviation or the beginnings of motorized this and beginnings of cars. I mean, people had to bet about what this industry would look like. The first cars were electric cars. First car sold in quantity in the United States were electric delivery vehicles used downtown in cities, delivering products were electric, ran on batteries. That was the bet. Well, that changed with the First World War. United States built thousands and thousands of gasoline-powered trucks to go to Europe and rustle through the mud. And people came back knowing how to fix those engines so those trucks got sold off as wholesale to farmers who used them on their fields when we had the gasoline and could take off like a rocket. So... you cannot predict the future. There's an Arab saying that I like. It says, "He who forecasts the future lies even if he tells the truth." We're making bets. That's what business is. We're making a bet. And if we're a rich company, we can make a bet and afford to be wrong. But if we're a startup, we have to be fast. We have to, we have to adapt as it, as, as the information comes in. And that's the nature of the story. The action agenda has to be quick adaptation to, to, to changing conditions.

16. 1:26:04 – 1:31:01

    Richard’s “value denials” exercise

    1. RRRichard Rumelt1:26:04

    2. LRLenny Rachitsky1:26:06

       I feel like you have another book here where you could adapt a lot of this wisdom to startups. I'm looking at my notes from when we were talking about it earlier and you had this point of when you're trying to write out a, a... You called it an action agenda, not a strategy. You're basically on the hunt for a big problem and an important problem and an achievable problem. And if that... Essentially you can boil that down to that is the job of a founder, to find an important problem and an achievable problem and then solve it for a lot of people.

    3. RRRichard Rumelt1:26:32

       Yeah. Yeah. I like that. I like, uh... The other exercise I used to take my students through was, um, what I called, um, value denial. Now what is it that you should be able to buy but you can't?

    4. LRLenny Rachitsky1:26:52

       Mm-hmm.

    5. RRRichard Rumelt1:26:54

       You know. And, and at the time I taught this stuff, I was upset 'cause I would lose my baggage on a nonstop flight from Los Angeles to Paris. So I'd like to buy baggage insurance. (laughs) So I'd like to buy a se- like that, you know, how do you get your baggage not to be lost? Now with, with-

    6. LRLenny Rachitsky1:27:13

       Mm.

    7. RRRichard Rumelt1:27:13

       ... security systems in place, it's less, less common. Uh, can I, can I find someone to help me remodel my home that's gonna be on time and on budget? Mm-mm. Not available. Can't buy it at any price. Uh, if I live in Hong Kong and I'm going to the airport, I can drop my luggage off downtown and it arrives at the airport checked in. I don't have to l- look at it. Why can't I do that in the US? Um, value denial. And then engineering. You know, thinking about how something ought to be. You know, that's how salesforce.com got started was, "Well, how should this be? It shouldn't be a computer. It should be a web page. It should be like Amazon, where it has books." And so that was the beginning of salesforce.com. I asked a group of students once to think about the perfect window, 'cause it's physically something we could think about in the classroom without doing a lot of research. Well, what's a perfect window? Oh, a perfect window should be transparent, should let the sun in. All right, so it should let in the light but not all the time. Sometimes you only want to watch the television so it should also darken. Well, that's what drapes are for, shades for. Okay. It should let in the air. Good. But not the bugs. Oh, so we have a screen. It should let in the air but not the noise. Ooh, that's a little harder. You know? So you go down the list of things that a window should do. It should let in light but not light. It should let in air but not the noise. It should not let in air we don't want it. It should let, not let in the bugs. It should maybe have shutters or not shutters. And so I said, "Well, how could you design the perfect window? What would it look like?" And there's some kids at MIT that had developed this thing that lets in air but keeps out the noise. There're these little auto- auditory filters, keep out noises in certain frequencies. Well, we don't have a perfect window. But, you know, think about it. You know, windows could be better than they are. Uh, and that's a real simple device that we're all familiar with. And, and look around you. Look at everything you've got and say, "Well, how should it be?" And there's opportunities there. Now, lot of the times, the opportunities are blocked by the lack of certain materials or regulation. Uh, regulators have decided that you can't sell a car in the United States unless it goes through a dealer. So that, that holds back innovation in that business, and so on. Um, you know, plumbing. How should plumbing actually work? Well, there's all sorts of rules about how plumbing works and electrical things work. You can't innovate there very easily because of the underwriters' labs and the unions and... A lot of the stuff that's done in home construction is there to create jobs, not to reduce costs. So, how do you get around that? You know, so you have to look at places where it's possible to innovate, first of all. But yeah, the idea of how do you make something better? How do you make it perfect? What would the perfect light switch look like? And so on. These are real si- simple silly questions, but they lead to new, new businesses and new firms

17. 1:31:01 – 1:33:57

    Closing thoughts

    1. RRRichard Rumelt1:31:01

       if you pursue them.

    2. LRLenny Rachitsky1:31:02

       I love how full of startup ideas you are. And I also think we came up at least two new books that you can write. I think you're gonna have a lot of work to do after this conversation. Final question. Is there anything you want to leave listeners with or take away? Is there a final nugget you just want to share with folks?

    3. RRRichard Rumelt1:31:19

       Well, I want to share with you that strategy is not mysterious, that I've spent my life studying strategy, pursuing it, consulting on it, writing about it. It's not mysterious. It's about solving problems. It's about solving the most important problem you're facing that you can actually do something about. You don't have to be some two to come up with a strategy. But you need to be focused on something doable and be consistent about it. Uh, I have a long list of things not to do. There's a fourth book there I'm thinking about writing called Don't Do That.

    4. LRLenny Rachitsky1:31:59

       I would read that. I love that title.

    5. RRRichard Rumelt1:32:01

       Can I tell you a story?

    6. LRLenny Rachitsky1:32:03

       Absolutely.

    7. RRRichard Rumelt1:32:05

       My wife, Kate, took up skiing when we got married, 24 or 25 years ago. And, uh, she had this stamp that she couldn't get rid of. It was kind of a... When you make a turn, you know, you turn like that and you put the ski out on the step. My meter ski on one ski and did all sorts of things to try to... Ah. She couldn't, she couldn't fix it. And finally we signed up with a illustrious ski teacher in Aspen, three-day intense program guaranteeing that she would lose her step, her ski And so we went there. And on the second day, I followed behind the instructor and her to see what was going on. And they had been through some exercises on day one. But on day two, they were focusing on this. And she would put out her ski like that and he'd yell at her and he'd say, "Don't do that." And after a day of being yelled at, "Don't do that," she didn't do it anymore. She was fixed. (laughs)

    8. LRLenny Rachitsky1:33:09

       (laughs)

    9. RRRichard Rumelt1:33:09

       So, uh, the secret technique that they had in this program for curing your stamp was to yell at you and telling you, "Don't do that."

    10. LRLenny Rachitsky1:33:19

        (laughs)

    11. RRRichard Rumelt1:33:19

        And so I'm thinking about a book called Don't Do That, about a business thing where, uh, I'm not sure it makes sense, but you have to noodle these things for a while before they begin to gel.

    12. LRLenny Rachitsky1:33:33

        Yeah. I love this idea. It reminds me, one of my, uh, friends is a therapist, and there's this video by Bob Newhart where he's a therapist and, uh, someone comes to him and they've, they've got all these problems, like, um, "I get really sad when I think about my mom and I have this chronic pain."

    13. RRRichard Rumelt1:33:48

        (laughs)

    14. LRLenny Rachitsky1:33:48

        And his advice, "Just, just stop it. Just stop."

    15. RRRichard Rumelt1:33:51

        Don't do that. Stop thinking about your mom.

    16. LRLenny Rachitsky1:33:52

        Just stop it. That's the advice.

    17. RRRichard Rumelt1:33:55

        Yeah.

    18. LRLenny Rachitsky1:33:55

        And so, I feel

18. 1:33:57 – 1:43:14

    Lightning round

    1. LRLenny Rachitsky1:33:57

       like there's a lot of synergy there. All right. Well, with that we reached our very exciting lightning round. Are you ready?

    2. RRRichard Rumelt1:34:04

       I guess so.

    3. LRLenny Rachitsky1:34:06

       (laughs) First question, what are two or three books you've recommended most to other people? I feel like this is gonna be a challenging question, but what comes to mind? (laughs)

    4. RRRichard Rumelt1:34:15

       It sort of is. Uh, yeah, I mean, the books that... I'm, I'm taking questions from the staff about The Innovator's Dilemma is, is always solid. Books on strategy that, that I recommend to other people, um, there aren't that many. So I like, uh, Playing to Win by Roger Martin. I really recommend other kinds of books. Uh, strategy books, I mean, it's easy to get a list of strategy books. But I, I think you should read biographies and histories. I think, you know, the book about Steve Jobs is brilliant. Uh, I like, I like books about, uh, business leaders. I recommend, uh, Andy Gross book, Only the Paranoid Survive, um, and a few others. But, um, I, I, I recommend that people read more broadly about people, Rockefeller's histories is fantastic. You know, the guy... And then, and there's the stuff about Rockefeller and how he put together... You know, I mean, Rockefeller was a robber baron and he built an empire and all that. You learn that in school. But what you don't learn in school is he dropped the cost of a gallon of kerosene from a dollar to 10 cents. Okay? That's the robber baron. And he made kerosene so inexpensive that he drove all the little mom and pop refiners out of business, which is why they hated him. So, you know, he was, he was, uh, a vicious competitor. But he, he dropped the price of something by an order of magnitude. Fascinating. So yeah, I mean, it's important to, to understand stories. Not just theorists, but stories.

    5. LRLenny Rachitsky1:36:21

       Yeah. I love how this always comes back to just being steeped in history, and this specific point about biographies is really interesting. And we'll link to all these books that you're mentioning in the show notes. Is there a favorite recent movie or TV show that you've really enjoyed?

    6. RRRichard Rumelt1:36:36

       Oh, yeah, sure. Well, I, I like Yellowstone like everybody else.

    7. LRLenny Rachitsky1:36:40

       Mm-hmm.

    8. RRRichard Rumelt1:36:40

       I'm fascinated by it. Recent movies other than Yellowstone? I'm, I'm not sure. Uh, we don't have a TV in the house right now, so I'm sort of not connected.

    9. LRLenny Rachitsky1:36:51

       That's amazing. That's the dream. I wish I could do that. (laughs)

    10. RRRichard Rumelt1:36:57

        The... Well, there will be a TV, but that room is being remodeled.

    11. LRLenny Rachitsky1:37:00

        Mm-hmm. Okay. (laughs) I see. Just a matter of time.Okay. Uh, is there a favorite interview question you like to ask people you interview, s- maybe specifically around helping you get a sense of are they good at strategic thinking?

    12. RRRichard Rumelt1:37:14

        Yeah. I like to ask people about what have you done that was hard that you're proud of? What have you done that, that was difficult? And what was it and why was it difficult and how did you, how did you get it done? I like to ask people about what they think was an interesting strategy from any time in the past they wanna, they wanna call out. Depending on the person's background, I, I might ask them about a particular company or situation and say, you know, "Why do you think this worked or why didn't it work?" So I don't tend to ask questions about theory. I tend to ask questions about things that happened. And partly I'm looking to, you know, does this person have any knowledge about the world or are they just, they just know what the professor said last year. Um, so that kind of thing.

    13. LRLenny Rachitsky1:38:28

        Is there a favorite product you've recently discovered that you really like? Whether it's an app, some you bought, some in the house, some on the road?

    14. RRRichard Rumelt1:38:36

        Well, we've got this new memory foam bed that we like. It's pretty amazing. Innovation. It's pretty... I didn't think we liked that, but we do. I really am fascinated by and I'm about to pull the trigger on buying one of these new smart telescopes.

    15. LRLenny Rachitsky1:38:53

        Smart telescopes? I haven't heard of that. What, what makes 'em so smart?

    16. RRRichard Rumelt1:38:56

        You know, it's 12 inch re- reflecting telescope and, uh, it's too heavy to lug around. It's too difficult to set up. But there are sort of new smart telescopes that run on a battery and you can put 'em outside, and the way they work is, first of all, they know where everything is in the sky, which has been around for a long time. But the new thing is they, they... it's like astrophotography. They, they'll look at something for a minute, two minutes, 10 minutes, an hour and form an image. You don't look through the telescope, you look at it on your phone or your computer. But you can see now the nebula that maybe the web telescope could see, and you can see it now and you can see stuff out there, uh, that you couldn't before. And these are new things for, you know, $1000, $2000 that, that are remarkable in what they can do.

    17. LRLenny Rachitsky1:39:56

        Excellent choice. Next question. Do you have a favorite life motto that you often find yourself coming back to or sharing with friends, either in your work or in your life?

    18. RRRichard Rumelt1:40:05

        I used to have a final lecture I give to my MBA students about little pieces of wisdom. Things not to do.

    19. LRLenny Rachitsky1:40:16

        Mm-hmm.

    20. RRRichard Rumelt1:40:18

        Things that offend people in other cultures. Don't do this if you're in Turkey, it means something else there. But I'd also say, at some point, your spouse or your partner will ask you, "Do you still love me?" And there's only one correct answer to that question, which is more than ever. And my wedding ring says that inside, more than ever. So I don't know if that's what you're looking for, but that's-

    21. LRLenny Rachitsky1:40:57

        Absolutely.

    22. RRRichard Rumelt1:40:57

        ... kind of life sense, piece of wisdom.

    23. LRLenny Rachitsky1:40:59

        That is really good advice. Gave me tingles. I'm gonna use that 100%. Thank you for some marriage advice. (laughs) Final question. Your daughter, Cassandra, is a writer as well, in fiction. She writes fiction. Is there anything that she taught you about writing that's helped you become a better writer?

    24. RRRichard Rumelt1:41:18

        Yeah. Cassandra is, uh, oh my god, she's got like 25 books on The New York Times bestseller list for teen fiction now. Uh, she started writing when she was 12 or 13. Uh, she had a, a talent for it. Um, uh, she's told, she's told me about the tension that you have to create in a, in a... She writes novels and that, you know, it's not interesting unless there's... Well, she started, we started talking about this when she was young. She was 14 and she asked me about what is romance? And I, I said, "Well, romance is a barrier." Romance is where there's a difficulty, you know, back to couple. And, you know, there's some kinda... And she said, "Oh, like he's rich, sh- she's poor." I said, "Yeah, like that." "Or he comes from the north side of town, she comes from the south." I said, "Like that." "Yes." And she said, "Oh, like he's a vampire and she's not." And I said, "Well, yeah, okay." (laughs) You know? But so yeah. Yeah. She has, is alerted me and taught me about that, uh, that ways of creating that kind of tension in, in writing. It, it doesn't work as much in business writing as I'd like, but I try to create this sense of, uh, it's good strategy, bad strategy is a sense of, you know, there's a, there's a tension between a right way and wrong way or if not a right and wrong way, at least there's a tension between should we go left or should we go right. Uh, it, it makes it interesting. Otherwise, it's, uh...... it doesn't catch people's emotional core.

Episode duration: 1:49:16